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March 25, 2013

Emerging Markets’ Lag Biggest Since 1998

Is it a good sign for developed markets, or a bad sign for all?

A stock board in Shanghai. (Photo: AP)

Is it more wind in the sails for the developed world’s recovery, or a sign we’re all once again in trouble?

Bloomberg reports the link between risk and reward in stocks is breaking down as emerging markets post the worst first quarter since 2008 and lag behind shares of developed economies by the most in 15 years.

Data analyzed by the news service finds the MSCI Emerging Markets Index’s 3.8% drop this year through last week trimmed its rebound from an October 2011 low to 22%. That compares with a 33% advance for the MSCI World Index and marks the first time since 1998 that developing-country shares have underperformed during a global rally. When adjusted for price swings, emerging market returns are 37% smaller than in advanced nations, Bloomberg notes.

Developing markets are trailing developed markets after most of their companies missed analyst profit estimates for the last five quarters and economic expansions from China to Brazil slowed to the weakest rates since 2009. A majority of MSCI World companies beat earnings projections, it notes, while the pace of U.S. growth has rebounded to levels reached before the financial crisis.

The news service adds the only other bull market emerging stocks lagged behind was from September 1990 through July 1998, a period when U.S. shares surged during the dot-com bubble and Asian equities were dragged down by the region’s financial crisis.

But not all emerging markets are faring poorly. Bloomberg points to Thailand and the Philippines as examples.

“Thailand’s SET Index has surged 73% since the current global rally began on Oct. 4, 2011, while the Philippine Stock Exchange Index rose 70%.” The Thai economy may expand by as much as 5.5% this year and the Philippines will probably grow at least 6%, according to government estimates. Economists surveyed by Bloomberg predict a 1.9% expansion in the U.S.”

Ariel Investments’ Rupal Bhansali, subject of Investment Advisor’s June 2012 cover story, told Bloomberg that one reason for the lag was that their “institutional frameworks are still a work in progress.”